Every day, I hear about people dreaming of self employment. Some voice their opinions on Twitter, stating again and again that working for yourself is so much better than working for a boss. Others come up to me in person and voice their dream, accompanied with a number of excuses why they haven’t quit their job yet.
Although aiming for self employment is a wonderful goal, it isn’t always better than working in an established company. There are a number of reasons that most people pursuing FIRE are salaried employees. For one, they might be more miserable in their jobs. But, perhaps more importantly, they earn significantly more. According to Trades Union Congress, the average self-employed person earned only only £12.3k in 2016/17. And if you just look at the full-time self-employed, things aren’t much better: In 2013/14, self-employed people working over 30 hours made just over £15k on average (median of all workers: 27k). Even with very low expenses, FIRE is almost impossible for the average self-employed person.
So, what are the pro’s and con’s? After 3.5 years of working for myself as a German and Pilates instructor, here’s what I’ve discovered.
As we’ve already seen, earnings are significantly lower for the average self-employed person. In addition to this, they are unstable and it’s unlikely that you’ll earn a similar amount every month. This might be because some jobs are busier during certain seasons, you fall ill and can’t work, your equipment breaks and you have high business expenses, or you simply want to take a vacation. Remember: whenever you don’t work, you don’t get paid.
To add to this picture of financial misery, your pension options are much worse. There is no employer match, so anything you contribute to your pension will come straight out of your pocket. Nobody automatically enrols you. You actively have to seek out a SIPP and start contributing diligently every month. How many people do you think will skip this? According to IPSE, 45% of those aged 35-55 – and it’s likely even worse with younger people.
What’s more, you have no paid holidays, so the temptation to skip them for a few extra days’ earnings is strong. I remember my first New Year’s Day in the UK: teaching clients in the studio at 8am. Many other self-employed people report not taking time off for years on end.
Why would anybody do this to themselves? Going self-employed seems like financial suicide – but are things really that bad?
Although earnings are lower and have decreased in recent years, a part of the reason is what is called ‘sham self-employment’. This happens when large organisations, such as uber, recruit independent workers and pay them a very low wage. In addition, these workers have to pay their own expenses and may not get holiday pay. When you look only at regular self-employment, which is not linked to such a business, earnings potential is a lot larger. Although you still have to pay your own business expenses, you can often charge a lot more for the same job (and keep a large percentage of it) if you work for yourself.
If you are an organised person and a hard worker, going freelance may be a good option. Every hour you spend working directly improves your earnings potential, which can be very motivating. You are responsible for your own success, not your boss or office politics.
Similarly, if you are already financially savvy, you will know how to make the best of your situation. The SIPP and LISA still offer good savings options for later life, and if you start saving and investing young, you can reach FI just like an employed person. There are also more options for part-time work as a freelancer. Once you are financially stable or even Coast FI, you can start to reduce your workload at will. It’s much easier to design your own life if you’re self-employed, and the job is much more flexible.
Finally, you have more autonomy to work on projects you enjoy. This is the one big reason why the dream of working for yourself persists. Everybody craves the freedom of being their own boss and the luxury of choosing their work. It truly is a gift!
Self-employment: is it a path to ruin or to great success? Everybody has to decide this for themselves, but the fact remains that almost 85% of the UK population remains employed.
Personally, I would not change my path, but I would also be wary of advising everybody else to ditch their job and start freelancing. Before you do so, make sure you have a plan of how to mitigate all the con’s and take full advantage of all the pro’s. If you are aiming for FIRE, a steady job is likely a faster and safer route, and self-employment more of a winding path.
Have you ever considered going freelance? What stopped you, or why did you end up taking the leap?